You want to be a rental property owner? Good!
Owning rental properties is an amazing way to build a passive income and can open many doors to help increase your wealth and real estate assets.
While watching these shows, you have probably thought to yourself “hmmm…I could do that!” Well, odds are…you can.
Sadly, it definitely is not as easy as it looks on TV though. Shows like Flip This House do a great job of showing the struggles and difficulties faced with investing in real estate, but often leave out many of the battles fought outside of the property that first time or smaller-scale investors often have to fight: obtaining permits, finding then firing then finding another contractor, managing contractors, and battling with banks or micro-managing investors.
There is good news though! If you are the type of person that is willing to put the hard work, blood, sweat, and tears into your property, then you can make it work. Passion and commitment will take you a lot further than you can imagine.
That being said, let’s check out some tips that can help you get into the rental business and on your way to building your real estate wealth.
Skip the Get Rich Quick Scheme!
The key to building real estate wealth through rental properties is to think long term. When purchasing a property to be used as a rental, you need to view the property through the long-term scope. Holding onto a rental property for long term is what will provide the greatest payoff both in rent secured from the property, but also through the equity built in the property.
For some more tricks on how to best utilize the equity built in your property, check out Equity Happens: Building Lifelong Wealth with Real Estate by Robert Helms.
As the saying goes, if it’s too good to be true it most likely is. And how true that usually is in real estate! If you want to get rich quick with rental properties, forget about it. Yes there may be those investors who have taken advantage of certain scenarios that allowed them to build immediate wealth through their rental investments, but I have yet to see a replicable “get rich quick” rental model.
If I were to compare real estate to equities, rental properties would be the mutual funds and 401(k)s of the market whereas wholesaling and flipping properties could be equated to stocks and investments more synonymous with high risk, high reward.
Focus on Positive Cash Flow Properties
With how much today’s real estate market fluctuates and so many different reports talking about future projections it is impossible to recognize when, or even if, your property value is going to appreciate. That is why the wisest investors are most attracted to positive cash flow properties.
So how do you know which properties will bring the most cash flow? Contrary to popular belief, it is a moderately priced home that has the higher likelihood of being cash flow positive than the higher priced, luxurious properties.
How could that be? Let’s take a look.
- Consider moderately priced property A. Property A is a $160,000 three bedroom single family home in a decently populated suburban area with a good public school, nearby amenities, and low crime rate. The average mortgage on this property might be somewhere around $1,100 per month and property taxes we will assume to be roughly $2,000 per year.
- Now consider fancy property B. Property B is a $500,000 glitzy downtown two bedroom high-rise condo. Though the amenities are many, the desired schools are potentially all private and crime rates may be a tad bit higher. The average mortgage payment on this property might be somewhere around $3,250 per month and property taxes we will assume to be roughly $6,200 per year. Being in a high-rise building will also bring assessments into the picture which we will estimate to be roughly $400 per month.
- Property A, being a 3 bedroom single family home, should be able to generate roughly $1,350 a month + utilities for rent. That is $150 greater than your mortgage! Take out the $2,000 for taxes and you just put $1,000 into the bank in the first year.
- Property B may be the more luxurious unit and likely yield a rent payment around $2,500 + utilities per month, but subtract out the building’s monthly assessments and the taxes and that leaves you $20,000 in the red at the end of the year.
When operating a positive cash flow rental property, do not simply take all profits and throw them straight into your personal checking account. Set aside a certain percentage of income from the property on a monthly basis to build a contingency budget for the property. You never know what issues and costs may arise down the road and you will be grateful to have that money set aside when they do.
Find the Demand
If you are smart you will work hard at the beginning to find the good areas where rental properties will provide that positive cash flow we discussed. Demand for rental properties certainly varies from one area to the next.
Start by looking for areas that provide the basics that anyone looking for a property would consider: low crime rates, good schools, and decent amenities like parks, restaurants, and retail developments.
When looking for areas where rental properties will be in demand, consider locales that have a semi-transient population or, in other words, people in transition. Key locations to own rental properties are areas that have universities nearby, lots of global corporation offices, companies that hire a lot of fresh college graduates, or popular vacation spots.
If targeting more of the family environment, looking for locations focusing on optimizing those basic needs (crime rates, schools, etc.) will open up your properties to families looking to get more property for their money.
When searching for where to purchase your rental property, scour the internet and do your research. Look at current rentals available in your target market and document how much rent they are charging and what amenities are offered in the immediate area. Working with local real estate agents can greatly help during the process as they will know more information about desired school systems, upcoming retail developments, etc.
Make It Desirable
When you find your rental property, make sure that you cater it to your target market:
College: If you are going to own a rental property near a university, you probably don’t want to put granite counters and beautiful details throughout the property. Keep it simple and renovate with hearty, durable materials. Larger properties with multiple bedrooms and bathrooms will also be very popular options for college students wanting to live with their friends.
Professionals: If you are going to cater your rental property to professionals and more of the corporate employee, focus on comforts and class. Making the property a retreat and somewhere that allows a professional to relax and unwind after a long day will help to attract that crowd. Also having a nice kitchen with space to entertain could potentially be important to this demographic wanting to host dinner parties and colleagues.
Families: If you are going to focus your rental property towards families, the main thing to consider is space and community. Does the property have enough bedrooms and bathrooms to comfortably fit a family and all of the kid’s toys? Does it offer a yard to play in? Are there good schools nearby and parks to play in? Also prepare to be a pet friendly rental property!
Cities: If you are going to own a rental property in a city, you can pretty much pick and choose any of the three groups mentioned above and cater your downtown rental for that group. The main thing to focus on with city rentals is optimizing the space. Storage space is usually limited in city units, so be creative with cabinets and closets to get the most out of the space. A city rental may also offer stunning views if in a highrise building, so make sure to optimize the space in a way that focuses on special features like that.
Vacations: If you are going to purchase a property in a highly trafficked vacation area you have one of two ways to go: 1) make it a luxury rental focused on the higher-end clientele or 2) make it a modest rental focused on families looking for more space and bang for their buck than a resort. Both parties are going to look for comfort, amenities, and nearness to attractions though, so make sure to make the property befitting of the locale and truly a destination property.
You still want to be a rental property owner? Good! Rental properties are a fantastic way to build long term wealth and if managed properly can be an amazing tool to aide in the growth of your real estate investments.
Do you currently own any rental properties? If so, what’s the #1 thing you have learned about owning a rental?
Good luck and as always…Become Property Invested!